Paper contributed to the XIV International Economic History Congress, Helsinki, Finland, 21 to 25 August 2006 Panel 61 Complementary relationships among monies in history MANAGING MULTIPLE CURRENCIES WITH UNITS OF ACCOUNT: NETHERLANDS INDIA 1600-1800 Willem G. Wolters Radboud University Nijmegen, The Netherlands 1. Introduction In his position paper for this workshop Akinobu Kuroda (2005) has pointed out that economists (and economic historians) generally assume that circulating or flowing amounts of money can best be depicted and analyzed by summing up various monies and measure them in their totality, as total amounts, further assuming that they are subject to the workings of laws pertaining to totalities, such as the quantity theory of money. The problem with this assumption is, as Kuroda demonstrates, that by doing this, one ignores the dynamics of different types of currencies circulating side by side. These different types may have different areas of circulation, or may be used in different markets, or by different networks of users. This may pertain to completely different types of money or to monies that are supposed to be denominations of one monetary system. In line with the general topic of this workshop and with Kuroda’s position paper, this paper will look at the phenomenon of multiple currencies in the area dominated by the Dutch East India Company (VOC). The time perspective chosen is a long one, from about 1600 till 1800. The leading question in this paper is the one Kuroda formulated in his position paper: how was compatibility possible among multiple currencies? One specific topic needs closer inspection, and that is the problem of managing different currencies, by using a unit of account. Another topic is the area of circulation of different types of coins. As the larger more valuable coins may circulate in a geographically wider area, 1 the relationship between local and foreign becomes a key dimension of the problem. It is to these issues that we will turn in the next section. 2. Theoretical considerations Unit of account and unit of payment Theoretically a distinction can made between two functions of money, viz., the measuring function and the exchange function, in other words the unit of account and the unit of payment. The Austrian economist Schumpeter (1908) has discussed this conceptual distinction systematically. The unit of account is used as a standard of value and of deferred payments and for the purpose of keeping accounts, while the actual unit of payment is used as a medium of exchange. The unit of account is abstract, while the unit of payment is concrete. Schumpeter argued that the two functions are completely different and in principle not interconnected, although in any working monetary system they have to be brought together somehow. This bringing together was realized completely under the gold standard system, introduced in a number of countries in the second half of the 19th century. The gold standard system made it possible to circulate a truly national currency within the borders of the territorial state. In line with Schumpeter’s analysis, the unit of account can be described as the subjective reflection of the knowledge of the price ratios of goods and services, expressed in this abstract medium (Van der Wal 1940, p. 48). The unit of account indicates the price ratios. The unit of account can become tied to a specific material medium of exchange, but can also be disconnected and become an imaginary money. Both trends can be observed in history. The relation between coin and money of account has been the subject of a heated debate among economic historians since the 1930s. Two Belgian historians, Hans van Werveke and Raymond de Roover argued on the basis of historical material that the moneys of account in medieval Europe were based on real coins. De Roover wrote: “Medieval monetary systems were pegged either directly or indirectly to gold or silver. They were based either on a real coin, (…) or on a coin which had ceased to circulate, but which still represented a definite weight of gold or silver.” Italian historian Luigi Einaudi (1936/1953) held the view that money of account was imaginary money, independent of any “real money”, that is of fixed coin or fixed quantity of precious metal. Imaginary money has developed out of real coins, with a precise gold or silver content. Imaginary money has the following connotations: (1) 2 Expressions in “imaginary money” are abstract numbers, used for enumeration; (2) These expressions are not absolute but relative numbers; (3) It is a matter of indifference which coin is chosen as the one whose rate is fixed. This system allowed every state to have its own unit of account. The unit of account was tied to the territorial basis of the state, while material coins circulated everywhere without consideration for frontiers. Einaudi (1953, p. 237) writes: “Imaginary money – here is my thesis – is not money at all. It is a mere instrument or technical device used to perform some monetary functions.” Einaudi then points out that rulers used imaginary money as an instrument of monetary policy. Recently historians Frederic Lane and Reinhold Mueller (1985, p. 468-479) have argued that the two views, “hard money” versus imaginary money, do not represent irreconcilable contradictions. The “hard money” view is correct for the medieval period studied by Van Werveke, while Einaudi’s imaginary money is correct for the later period. Lane and Mueller divide the millennium between Charlemagne (around 800) and the French Revolution (1789) in three periods: the first extends from Charlemagne to circa 1250, and was characterized by the minting of a single coin; it was during the second period, from about 1250 till about 1650, that a true system of money of account was created, tied to real coins by a varying relationship with a specific precious metal content. It was during the third period, from the around 1600/1650 till the end of the 18th century, that an imaginary unit of account was used “as a measure of exchange value, no longer tied to any particular coin, but useful in stating the relative values of all the coins in use” (Lane and Mueller 1985, p.476). In his article Einaudi discusses the use of moneys of account in the multiple currency system of Milan in the 18th century. Einaudi’s point, that rulers used the imaginary unit of account as an instrument of monetary policy is also found in the study of late medieval European currency systems, by economists Boyer-Xambeu, Deleplace and Gillard (1994). These authors have pointed out that the rulers of territories used the unit of account to proclaim the definition and the value of domestic and foreign coins. In historical perspective the unit of account was originally not imaginary, but possessed a real basis. Later, the unit of account became an abstract numéraire. The general rule was that coins of precious metals circulated everywhere, without consideration for frontiers, while units of account were tied to a political territory. In this system rulers had two ways of changing the value of the coin: (1) by altering the weight or the fineness of the coin; (2) by decreeing a different value in terms of the unit of account, without changing its intrinsic quality of weight or 3 fineness. However, in doing so the rulers also changed the value of the unit of account in terms of precious metal. If the ruler declared that a coin in circulation was henceforth worth more units of account, the unit of account was implicitly weakened in terms of the metal represented. If the coin was given a lower official value, the unit of account was strengthened. Rulers were not free to alter the valuation of coins at will. They had to stay close to the value at which the coins circulated among traders in the market place. Usually the official proclamation of the coin’s value followed the current commercial practices. Boyer-Xambeu et al (1994) define the organization of exchange as ‘the interrelation between different units of account’ (1994, p. 4). They distinguish between private money, created by merchants and public currencies, created by territorial rulers. While each sovereign zone had its units of account, the world of exchange by bills used ‘exchange moneys’, which could be the local unit of account, but could also be a specific type of money, created for the exchange by bills. Domestic versus foreign State managers acted as if these boundaries were important, issued decrees prohibiting the importation of certain types of coin and the exportation of others, trying to control the cross-border movements of these items. Local elites defended their privileges against attempts at state centralization. Merchants operated in long- distance networks of exchange and international markets, often defying the policies of the state managers. In the 17th century the Dutch government and the United East India Company (VOC) made a distinction between coins for trade (‘negotiepenningen’) and coins for local circulation (‘standpenningen’). They were expecting that coins from this last category, when shipped to the Netherlands Indies, would remain in local circulation. From the time of their arrival in Asia, around 1600 till the second half of the 19th century, the Dutch have struggled with the problem that silver coins quickly disappeared from local circulation in their Asian possessions. They explained this fact with the theory that silver and silver coins were 20 to 25 percent more valuable in Asia than in Europe. From a practical point of view the Dutch officials in the Netherlands Indies had to design a monetary system that was attuned to this problem. This brings us to Gresham’s law, the famous statement that bad coins drive out good coins.